Permitted Disparity - PV Using 417e Rates

[JAY21]

I don't do many permitted disparity plans these days. On a takeover plan a participant will be getting a lump sum distribution. The excess benefit % uses the maximum permitted disparity % (0.75% for SSRA of 65; reduces to 0.70%, for SSRA=66, and .65% for SSRA = 67). The Actuarial Equivalence for the excess portion for purposes of calculating a lump sum distribution uses standard interest rates (7.5%) and a standard mortality.

Does applicable of 417(e) rates have any impact on the excess benefit % ? Is there any adjustment/normalization due to 417(e) I think I remember that you didn't have to make any special adjustment just for 417(e) lump sum purposes to the excess benefit %, but I'm not positive on that. Appreciate any feedback.

[My 2 cents]

Since you mention 417(e) I presume that you are talking about a defined benefit plan. I am assuming that you are asking about benefits actually payable under a lump sum option, not non-discrimination testing. Even if you are asking about testing, my recollection is that one normalizes the entire benefit, not just the excess portion under the permitted disparity rules.

I am having some trouble coming up with any interaction between permitted disparity and 417(e). The sequence would be that you would calculate the accrued benefit (payable at normal retirement age under the plan's normal form, which is usually a straight life annuity). You would then apply the plan's provisions concerning adjustments for payment commencing at a date other than normal retirement age (if applicable) and under payment options other than the normal form (including the QJSA). Unless the plan defines actuarial equivalence using 417(e) (which appears not to be the case here), I don't think 417(e) comes into play for these adjustments at all, except for payment options that are not non-decreasing benefits payable for at least the life of the participant (i.e., a lump sum option).

Unless you are talking about benefits large enough to be affected by the Section 415 limitations with respect to lump sums, the 7.5% interest rate would have no impact (given the current level of 417(e) interest rates) on the amount payable as a lump sum (although 7.5% might come into play if you are performing general testing calculations under IRC Section 401(a)(4)). Irrespective of whether part of the benefit is attributable to permitted disparity, the lump sum equivalent of the entire benefit must be no less than the value of the normal form benefit determined using IRC Section 417(e) interest and mortality.

To the best of my knowledge, even if one is talking about 415 limitations, there would be no distinction between the adjustments with respect to the portion of the benefit based on the excess portion under permitted disparity and the remainder of the benefit. All calculations aimed at converting a life annuity to a lump sum should use the same rates for the entire benefit.

[david rigby]

The Actuarial Equivalence for the excess portion for purposes of calculating a lump sum distribution uses standard interest rates (7.5%) and a standard mortality.

Does this mean the the plan defines the LS differently for the base portion and the excess portion of the AB?

Does the plan also provide that any LS will not be less than the LS calculated using 417e3 rates?